Defined Benefit and Defined Contribution Pensions: Changes in Pension Accounting Standards and Differences in the Demand for Shares

The study predicts that the shift in pension accounting standards to FRS 17 and IAS 19 influenced the security selection of defined benefit (DB) schemes but not defined contribution (DC) schemes, which are unaffected by the accounting change. Consistent with this prediction, the study finds that the security selection of DB schemes varies to that of DC schemes in ways that prior research suggests are within scope of the change in pension accounting standards, and is similar to DC schemes in ways that are beyond the scope of the change in accounting standards. DB schemes invest more in riskier and higher expected return stocks than DC schemes, consistent with greater emphasis on investment performance. DB schemes invest relatively less in the shares of firms with high performance on long-term factors, and relatively more in the shares of firms with high current financial performance, consistent with a short investment time horizon. Taking the allocation to equities as given, this study finds that the impact of pension accounting standards on security selection is an increase in risk exposure by DB schemes. Evidence that DC schemes look further ahead when making investment decisions suggests they have the closer alignment to the long-term nature of growing pension wealth for future decades.